By Dr. Brian G. Long, Ph.D., C.P.M.
For this month’s report, it is gratifying to see the West Michigan economy continue to grow, even though the pace remains subdued. The data and comments collected in the last two weeks of April remain optimistic, although there remains a scattering of firms that are either flat or declining. NEW ORDERS, our index of business improvement, remained positive but backtracked to +7, down from+15. By contrast, the PRODUCTION index rose to a three month high of +20, up from +16. Activity in the purchasing offices, the index of PURCHASES, rose sharply to +14, up from +3. For April, it can be noted that the West Michigan economy approximately paralleled the performance of the national economy as well as the overall Michigan economy.
Reviewing our local industrial groups, near-record auto sales are still keeping the local auto parts suppliers operating at full capacity, even though a couple of firms are reporting a slight hesitation. The office furniture business remains stable, and the spring season has resulted in significant improvements for some firms. Just like last month, our industrial distributors were generally positive. Capital equipment firms continue to report widely mixed results. For April 2016, the business sentiment of the local survey continues to be quite positive. The index which asks about the perception of the next three to six months, the SHORT TERM BUSINESS OUTLOOK, remained relatively stable at +34, down modestly from +37. For the outlook for the next three to five years, the LONG TERM BUSINESS OUTLOOK, the April index rose to +49, up from+44. Given the pessimistic numbers we reported six months ago, the current mood is much more confident.
Good news comes from Mike Dunlap’s quarterly survey of the office furniture industry. Most of the statistics came in just a few points below the all-time records set about twelve years ago. Mr. Dunlap further noted: “The industry continues to grow steadily. Obviously the smaller to mid-sized companies are growing faster than the Top Five. The Overall Index is strong and is definitely above the 54.79 Survey average. 2015 was the best year we had seen in well over a decade, and we remain confident that 2016 will be even better!”
The national report from the Institute for Supply Management, our parent organization, reported a small but significant improvement for April. NEW ORDERS, ISM’S index of business improvement, rose to +21 from +20. The PRODUCTION index edged higher to +22 from +17. The EMPLOYMENT index, which has been negative for the past six months, returned to positive at +5, up from -4. However, because of statistical weighting, ISM’s overall index remained positive but retreated to 50.8 from 51.8. By contrast, the U.S. survey conducted by Markit.com, the international economics consulting firm, remains much more cautious. Despite a modest increase in NEWORDERS, the rate of expansion was the weakest since December 2015. The final U.S. manufacturing PMI came in at 50.8, down from 51.5 in March and only slightly above the 50.0 no-change threshold. The survey author opined: “The April PMI data suggest there’s no end in sight to the current downturn in manufacturing activity. The survey indicates that factory outputs are dropping at an annualized rate of approximately 3%, and factory headcount are being culled at a rate of around 10,000 per month. Rather than reviving after a disappointing weak first quarter, the data flow therefore appears to be worsening in the second quarter, raising the question marks over whether GDP growth will improve on the near-stalling seen in the first three months of the year.”
The world economy continues to show signs of flattening. According to the J.P. Morgan Global Manufacturing survey of 31 nations released onMay 2, JPM’s index ofNEWORDERS edged lower to 50.4, down from 51.4. The PRODUCTION index eased to 50.4 from 51.3. JPM’s Global Purchasing Manager’s Index edged lower to 50.1, painfully near the break-even point of 50.0. The Eurozone PMI posted a very modest increase to 51.7, up from 51.6. The survey author and chief economist forMarkit remains cautious: “The growth rate of the global manufacturing sector ground to a near standstill at the start of the second quarter. The rate of expansion for PRODUCTION and NEW ORDERS decelerated back towards the broadly stagnant outcomes registered in February. Conditions remained muted in many domestic markets, while international trade flows continued to deteriorate. The level of new export business fell for the third straight month, and to the greatest extent, since September of last year.”
Auto sales for April posted a gain of 3.5%, and the SAAR (seasonally adjusted annual rate) rose to 17.42 million, slightly below the 17.5 million forecast by analysts, but up sharply from the March sales pace of 16.56 million and 16.77 million in April 2015. The strong sales are attributed to lower gasoline prices, near record cash incentives, favorable finance offers, pockets of pent-up demand, and a reasonably stable national economy. Sale rose 3.6% at Ford, 5.6% at Fiat- Chrysler, 14.4% at Honda, 3.8% at Toyota, and 12.8% at Nissan. GeneralMotors lost 3.5%, and Volkswagen lost 9.7% because of continued fallout from the emissions scandal.
For the unemployment statistics, most West Michigan reporting units are at least a full percentage point better off than a year ago. The Kent County unemployment number for March came in at 3.3%, Ottaway County at 3.2%, and Kalamazoo County at 3.7%. The employment picture is the best it has been since the recovery began seven years ago, although some segments of the workforce have not participated in the recovery. For our local survey, the index of EMPLOYMENT remains positive at +11, slightly lower than the +14 reported for March. As long as the EMPLOYMENT index remains positive, we should expect to see some modest improvement in our local unemployment rates. However, it is worth repeating that the industrial sector alone cannot be counted on to unilaterally drive the unemployment rates lower.
Although many factors fostered the Great Depression 85 years ago, the trade war ignited by Smoot-Hawley tariffs is often cited as a significant factor. The Economist magazine, a British publication, worries that a new trade war could be spawned by the political rhetoric of the 2016 presidential election. The editors complain that ALL of the top presidential candidates in BOTH parties favor new trade restrictions, presumably to “protect American jobs.” This language harkens back to Smoot-Hawley, and raises the prospects of potential trade wars breaking out with some of our major trading partners. As of March 1, the Department of Commerce imposed tariffs of 266% on some Chinese steel imports. So far, the Chinese have not responded. Based on past history, some kind of repose is almost inevitable.
For all of 2015 and most of 2016, our index of PRICES has been sharply negative. However, for March and April of this year, the index has returned to positive, rising to +14 and +6 respectfully. Although most of the basic commodities prices are no longer falling, the big problem is that the recent imposition of tariffs on Chinese steel has resulted in almost every size, shape, and grade of steel going up in price. For the office furniture and automotive industry, the lower steel prices were good for the bottom lines of the major firms as well as their parts producers. However, higher steel prices are probably here to stay, at least as long as the world economy stays out of trouble.
Coming on the heels of a tepid 1.4% growth rate for the fourth quarter of 2015, it goes without saying that the first quarter of 2016 GDP release from the Commerce Department was a disappointment. Although the initial report of 0.5% growth is “preliminary,” it still portends that the best we can hope for is more slow growth for the next few months.
In summary, we continue to balance the good news with the bad. Subject to the obvious limitations, our local unemployment rates have returned to near-full employment. The national ISM index remains marginally positive, and our local statistics have resumed the pattern of slow growth. However, numerous countries around the world have slid into recession, and European growth, while still positive, is disappointing in view of the central bank’s accommodative monetary policy. The PMI from China remains negative, but since the government news agency seized the survey fromHSBC about four months ago, we are not sure that the real numbers might be even weaker than reported. A recent Wall Street Journal article now questions the efficacy of the economic data coming from India. Right now, it appears that the U.S. economy is going sideways, and that the slow growth we have seen for the last seven years may get even slower. Locally, as long as auto sales and office furniture sales remain strong,WestMichigan should continue to outpace the overall U.S. economy, but there is no prospect for faster growth.